Canadian dairy pricing sours NAFTA

03 Sep, 2018 12:46 PM
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US President Donald Trump and Canadian Prime Minister Justin Trudeau at a G7 Summit where the two clashed.  Photo: AP
Under the dairy supply management system, Canada sets quotas for production and regulates prices.
US President Donald Trump and Canadian Prime Minister Justin Trudeau at a G7 Summit where the two clashed. Photo: AP

Montreal: American farmers have been frothing against Canada's strict management of its dairy industry for years - so it was not entirely surprising that when hopes of reworking a NAFTA deal evaporated this week, they did so over milk products.

Under the dairy supply management system, Canada sets quotas for production and regulates prices. Protecting that system has always taken outsize importance in Canadian trade negotiations, but a few new circumstances brought tensions to a boil this time around.

READ MORE: Saputo criticises Canadian milk scheme

First, most of Canada's dairy farms are in Quebec, a politically crucial province that traditionally makes and breaks the country's federal elections. They also happen to be concentrated in a few swing electoral districts, or ridings, said Avery Shenfeld, a senior economist at Canadian bank CIBC.

"Even though this does affect a relatively small number of people . . . there's a vocal group of people in the industry that keep the pressure up on politicians to side with maintaining the existing system," he said.

On top of the normal political concerns, Quebec just began a provincial election campaign. The incumbent leader, Philippe Couillard, is a Liberal, like Prime Minister Justin Trudeau, and he's been struggling in the polls.

Two months ago, Couillard advocated for flexibility, telling Bloomberg that when it comes to a particular American grievance around "ultrafiltered" milk, used in cheese production, "let us see how we can approach that separate from" the bigger system.

This week, he's stuck firmly to the message that protecting dairy farmers is non-negotiable.

"We have all the political leaders in Quebec coming out to say that we need to protect Canada's dairy industry from dumping from the US," Shenfeld said.

After four days of marathon negotiations between Canadian and US officials failed to produce an agreement on Friday, the White House told Congress it would enter into a revised trade deal with Mexico and that it was up to Canada to decide whether to remain in the trilateral NAFTA pact.

"Today the president notified the Congress of his intent to sign a trade agreement with Mexico — and Canada, if it is willing — 90 days from now," Robert Lighthizer, the American trade representative, said.

The Canadian dairy industry is only about a 10th the size of the US industry, said Mike von Massow, a food economist at the University of Guelph in Ontario. There's always been a fear of how a glut of American dairy could affect the Canadian market, if the product were able to cross the border more easily.

Milk on its own "doesn't travel well," von Massow said. In the past five years, however, it's become easier to concentrate milk proteins, creating an ingredient for cheese.

This product is still a "pretty tiny" share of the market, but its advent raised new alarm bells in Canada, said von Massow. It wasn't subject to dairy tariffs and crossed the border easily until Canada changed its domestic price for that product last year.

That new protection inspired Canadian dairy farmers to invest in ultrafiltering technology, raising the stakes again for the Canadian government, which has offered to compensate dairy farmers in the past for trade deals that hurt them. In 2015, the government offered a compensation package totaling $4.3 billion for two trade deals.

On the other side of the border, however, Trump singled out those protections for Canadian farmers as an unfair blow to their US counterparts, tweeting in March that the country should treat American farmers better. "I think it just stuck in the president's craw, to a certain degree," von Massow said.

Canada had offered the United States more access to its dairy market under the Trans Pacific Partnership, which it lost when it rejected that deal, von Massow said. "They're looking for a win on this issue," he said.

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